What is intrinsic value based on?

Intrinsic value is primarily based on the cash flows generated by a company. This concept revolves around the idea that the true worth of an investment should be determined by the present value of its expected future cash flows. Investors often calculate intrinsic value by estimating the future cash flows a company will produce and discounting them back to their present value using an appropriate discount rate. This approach considers both the magnitude and timing of the cash flows, which is critical in assessing the underlying financial health and profitability of a business.

While other factors, such as projected earnings growth, asset book values, and market trends can serve as supplementary information for evaluating a company's financial situation, they do not directly calculate intrinsic value. Instead, they might be components or considerations within the broader analysis of cash flows that ultimately lead to a determination of intrinsic value. Thus, focusing on cash flows provides a more fundamental and often more reliable basis for assessing a company's true worth.